Month: February 2004

Medicaid and the High Price of Pharmaceuticals

The price that Medicaid pays for pharmaceuticals is based upon the price in the private market. When Medicaid prescriptions are only a small portion of the total market this works reasonably well at avoiding the twin problems of monopsony (Medicaid pushing prices so low that R&D incentives are curtailed, as has happened in the vaccine market) and monopoly (pharmaceutical firms jacking prices up above fair market value).

But in some areas, Medicaid accounts for a large fraction of the market. The Medicaid share for HIV drugs, for example, is more than 50% and in antipsychotics the Medicaid share is more than 75%! (I have cribbed from this paper by Mark Duggan.) In this situation it makes sense for pharmaceutical companies to raise prices – they lose customers in the private market but this is more than made up for by the increase in prices that they can charge to Medicaid. As a result, average prices for HIV and antipsychotic drugs are higher than for any other drug categories.

The Medicaid pricing formula can create a vicious spiral. Medicaid pricing causes prices to rise which pushes more people into Medicaid thereby shrinking the private market and increasing the incentive to raise prices yet further. To add insult to injury, high pharmaceutical prices are then said to demonstrate why we need more government involvement.

Why have so many Americans left the work force?

Since 2001 nearly two million Americans, between the ages of 25 and 54, have left the workforce. This is why the unemployment rate has been falling, but the number of people with jobs is not showing comparable improvement.

Why leave the work force? A recent (Tuesday, February 17, “More Americans are Leaving the Work Force”) Wall Street Journal article suggests several answers:

1. More people are taking early retirement. Interestingly, workers over 55 are reentering the work force, the only group to show significant net increase. So these early retirements must be early indeed, or could involve a temporary willingness to live off severance pay.

2. Educated black women are leaving the work force in greater numbers. Some are losing their jobs. Others are returning to school for an advanced degree. In any case this group shows one of the largest participation declines, from 82.3% in 1998 to 76.3% in 2003.

3. Many people, especially women, are leaving for labor force for reasons of disability. Between 1999 and 2003 applicatons for federal disability insurance benefits rose from 1.2 million to 1.9 million. It is unlikely that more people are being injured. Employers are less willing to offer flex-time or part-time work during hard times, which causee disability claims to increase. See Alex’s post Paying for Disability for more.

4. White collar employees, hit by downsizing, are returning for additional education. The new trend is for college graduates to return to community colleges for retraining.

The bottom line: I don’t doubt any of these hypotheses or estimates. But I still don’t understand why the number of employed Americans is recovering so slowly. On the bright side, parts of #1, #2, and #4 will later kick in as productivity benefits, or reflect a lesser need to work.

Markets in everything, continued

How about this? [is] the first Internet company to help drivers contest parking tickets online…”It’s such a unique concept — fighting tickets for you,” says Austin, for whom the service was a godsend, given that she averages 5 to 10 parking tickets a year. “Some of these tickets are unfounded and you start getting a little mad every time you write a check to the city.”

On the Web site, clients who get tickets in the District, New York or San Francisco are guided through 30 to 50 questions about the circumstances of their tickets — whether the meter was broken, what the parking sign said, did they have a medical emergency, etc. They transfer details from the ticket to a look-alike online version. Then they key in their credit-card data to pay for the service — if the ticket is dismissed. No dismissal, no charge.’s computers analyze the data in search of grounds for dismissal. If there are none, clients get an e-mail recommending that they pay the ticket promptly. It’s free advice. But if the computer finds a loophole, technicality or error, or a compelling reason to contest, the client is e-mailed a customized dismissal-request letter, with instructions on what proof to attach and where to mail it.

Because her car was disabled, Austin’s ticket was dismissed. charged her half of what the ticket would’ve cost her — $25. Case closed.

The District of Columbia takes in more than $100 million in parking tickets each year, a major source of city revenue. The head of claims that seventy to eighty percent of those tickets should be dismissed for technical or legal reasons.

Here is a previous installment of Markets in Everything, try this one too.

Outsourcing medical experimentation

India is emerging as a new proving ground for pharmaceutical trials. Clinical trials in India typically cost 50% to 60% less than in the United States. The Indian population is genetically diverse, labor costs are much lower, the number of people is large, many Indian hospitals keep good records, and many diseases are prevalent in India. Furthermore many Indians are “drug naive,” meaning that they are not taking other drugs that could influence trial results. The Indian government, however, will not allow testing for basic drug safety, out of fear that Indian nationals would be viewed as “guinea pigs” for the West.

The bottom line: Medical outsourcing will lower drug development costs and save lives.

The full story is from Thursday’s Wall Street Journal, “India Emerges as New Drug Proving Ground,” Marketplace section. Here is an earlier MR post on medical outsourcing.

Econometrics Text

I am teaching econometrics this semester and using a new book, James Stock and Mark Watson’s Introduction to Econometrics. It’s a very good textbook.

Stock and Watson use a “robust” estimator of standard errors right from the beginning. This means that they can dump an entire chapter on hetereoskedasticity and methods of “correcting” for hetereoskedasticity (these rarely worked in any case.)

They do not waste time discussing the difference between the t-distribution and the normal-distribution. Instead, they assume reasonably large datasets from the get-go and base their theorems on large-sample theory.

The book is not cluttered with examples. Stock and Watson use a handful of applications that they return to again and again as they introduce new problems and new techniques – thus simple regression is introduced with the goal of estimating the affect of the student-to-teacher ratio on test scores. The problem of omitted variable bias is then introduced and the solution of multiple regression then discussed. Later the same example is used to discuss fixed effects and so forth.

Finally, they have a good chapter on evaluating research designs for internal and external validity. In other words, they discuss how to tell the difference between a good study and garbage – really the most important asset for any reader of statistical work.

Two regrets. I would have liked an early chapter on exploratory data analysis. I would have loved a chapter on regression discontinuity design.

Cell phones in Japan

About 70 million Japanese — 55 percent of the population — have signed up for Internet access from their cellular phones, a threefold increase from 2000. Cell phones, or keitai in Japanese, are closing in on computers as the device of choice for surfing the Internet. While the Japanese are using their cell phones in the same way many Americans use their laptop computers or personal digital assistants, they also are pulling out their phones to watch TV, navigate labyrinthine city streets with built-in GPS systems, download music, take and transmit home movies, scan bar-coded information, get e-coupons for discounts on food and entertainment, pay bills, play Final Fantasy, even program karaoke machines.

Here is the whole story.

Google’s newer competitors

Yahoo just dumped Google for its own search engine. But other competitors may prove a more serious threat:

Teoma relies on the rankings of experts to a greater extent.

Mooter relies more heavily on which links get clicked, and uses that information to produce personalized rankings for each individual user.

Microsoft is working on integrating search into every Windows mode, and also on perfecting the direct question and answer approach:

Take Microsoft Research’s AskMSR program, which Brill and his colleagues have been testing on Microsoft’s internal network for more than a year. At its core is a simple search box where users can enter questions such as “Who killed Abraham Lincoln?” and, instead of getting back a list of sites that may have the information they seek, receive a plain answer: “John Wilkes Booth.” The software relies not on any advanced artificial-intelligence algorithm but rather on two surprisingly simple tricks. First, it uses language rules learned from a large database of sample sentences to rewrite the search phrase so that it resembles possible answers: for example, “___ killed Abraham Lincoln” or “Abraham Lincoln was killed by ___.” Those text strings are then used as the queries in a sequence of standard keyword-based Web searches. If the searches produce an exact match, the program is done, and it presents that answer to the user.

Read the whole story on why Google is so vulnerable and has so few structural advantages in the search market. Thanks to for the pointer.

Where do immigrants go?

The geographic distribution of immigrants leads to some of the biggest complaints about cross-national migration. Disproportionate numbers of immigrants go to California, Texas, and New York. Potential problems include school overcrowding, fiscal burdens on local governments and hospitals, and weaker incentives to assimilate. I’ve heard claims that it would be fine to take in extra immigrants, provided they would work on company towns in central Nebraska.

The question arises to what extent distributional problems are self-correcting. If a state declines in quality, some immigrants will start to look elsewhere. It resembles yesterday’s question of whether a blogging topic can become overcrowded.

We now have some recent evidence. For the first time in thirty years, immigrants are finding California a less appealing place to settle. The 2000 census measures 24.8 percent of all new arrivals going to California, down from 37.6 percent in the 1990 tally. New York arrivals are down as well, from 13.7 percent of the share to 11.8 percent. Those changes are so big that virtually every other state has a bigger share of the total, with Texas, Georgia, and North Carolina showing the largest gains.

The results also show that poverty is declining among both established and arriving immigrants in California, heralding positive future trends.

Here is coverage from USA Today. Here is the original research. Here is the home page of Dowell Myers of USC, the researcher.

The bottom line: Good news all around. A more even spread of immigrants, achieved by voluntary means, will ease California’s fiscal burdens and bring gains from trade to the other states.

The Wrath of Khan

Peter Gordon has a new blog which will focus on the economics of urban planning. Peter is insightful on many topics, however, as this recent post indicates.

Intelligence agencies consume a lot of money (actual amounts unknown) and they often fail miserably. Perhaps worse than the Iraq WMD failure by all of the Western intelligence agencies was their inability to detect 15 years of nuclear secrets sales by Pakistan’s Abdul Qadeer Khan. Yesterday’s WSJ featured an op-ed by Bernard-Henri Levy whose best-seller in France, “Who Killed Daniel Pearl?” seems to have been closer to reality than anything else. Levy argued that Pearl was murdered because he was on the trail of the Pakistani clandestine nuclear secrets sales. The Khan confession (and his strange public pardon by Pres. Musharraf) gives Levy’s version some substantial corroboration.

One free-lancer upends armies of professional spooks. Is anyone surprised?

Darwinian cattiness

…when women are at the most fertile point in their monthly cycle they tend to have a lower opinion of other women’s looks. And that’s not just because of mood swings. Menstrual phase had no effect on how the same women rated the looks of men, reports Maryanne Fisher of York University in Toronto, Canada.

Here is one version of the story. Here is another. Here is the home page of the researcher.

The future of blogging?

Read Glenn Reynolds at His bottom line: We have enough blogs about wars and campaigns. Cover local politics, local bands, area restaurants. Use video if you can. In other words, think global, blog local, if you wish to change the world.

The economist in me: Can you have overcrowding in one blogging area? Say you have two roads to a destination, and drivers can observe how crowded each road is. Under some conditions drivers will allocate themselves efficiently across the two roads (average returns will equalize, marginal returns may not). So if the private returns to blogging in one area fall through crowding, some rough mechanisms operate to induce bloggers to leave that area. You might blog in a new area to attract a bigger audience, for instance. Alternatively, Glenn may be saying that local blogging has a higher social than private return, relative to blogging the national scene.

And if they had asked me? For economics, we are still at the margin where new blogs enhance each others’ value, rather than lowering it.

CDs as loss leaders

An increasing percentage of compact discs are sold in mega-chains, such as Best Buy or Wal-Mart, as loss leaders. Offer the CD at a very cheap price, and hope that the buyers also take home a television set. This practice is the central reason why Tower Records recently went bankrupt.

Loss leader CDs push music in a more mainstream direction. The impulse buy is for the TV, the musical purchase is planned, which favors established stars with new releases. Sudden impulse buys of unknown musical products, by definition, do not bring people into the store. In essence consumers have decided they would rather bundle hit musical releases with TV sets and computers (the Best Buy model), than with more obscure musical releases (the Tower model).

Consumers with mainstream musical tastes are better off, but how about consumers who prefer the niche products? On the downside, hit CDs are cross-subsidizing obscure CDs to a lesser degree than before.

Nonetheless not all hope is lost for buyers with indie tastes. and other Internet services offer a wide variety of releases and lessen the need for such a cross-subsidy. And keep in mind that the cross-subsidy went two ways. The customers who prefer music from Madagascar no longer have to cross-subsidize the Eminem displays in Tower. The CDs are held in Amazon-linked warehouses, which is cheaper, even once you take shipping into account. Furthermore the desire to build up the Amazon brand name cross-subsidizes obscure products of all kinds, many of which Amazon makes little or no money from.

The other key musical trend of our time is illegal downloading, which hurts the top artists most of all. Indie releases use the Internet for publicity, and world music artists learned to live without copyright protection a long time ago. Legal downloading, through iPod, subsidizes music of all kinds. None of the iTunes songs make money for Apple, rather music of your choice (if they can get the rights) is a loss leader for hardware. Most people buy iTunes, not for the latest hits, but to hold a diverse mix of their past and yet-to-be-known future favorites. And most satellite radio channels do not play hits but rather serve niche tastes. XM offers a wide variety of channels, in part to make its brand name well-known and focal.

The bottom line: Don’t worry about music as a loss leader. Cross-subsidies all over the place, and point in many differing directions. But at the end of the day, both the demand and supply for musical diversity are alive and well.

Food for thought

In case you were getting too bullish about the prospect of a Comcast buyout of Disney, Variety magazine (Feb.16-22, p.67) throws some cold water on the idea:

A hefty 34% of Disney’s operating income is derived from its Theme Parks & Resorts division, a business which is struggling against a range of cyclical economic woes. Theme Parks is slated to eat up nearly 70% of Disney’s total capital expenditure ($900 million) next year. And Comcast has no expertise in this area.

The Disney retail stores have been on the sales block for some time, with no potential buyer identified. Plus Disney just lost its deal with Pixar, the source of its big animated hits, and much of Disney’s income comes from overseas. Comcast has virtually no experience in the international arena. Well, there is always ESPN…